By Tiernan Ray

Societe Generale’s Andy Perkins today goes in different directions regarding the shares of Ericsson (ERIC) and Nokia (NOK), raising his rating on Ericsson to Buy from Sell, with a target of 95 Swedish Kroner on the ordinary shares, and cutting Nokia stock to Hold from Buy, with a €5.80 price target on the ordinary shares.

Nokia shares today are down 15 cents, or 1.9%, at $7.77, while shares of Ericsson are up 11 cents, or 0.9%, at $12.05.

Regarding Ericsson, Perkins had been worried that a slowdown in U.S. carrier spending would hurt the stock, but he now thinks that with U.S. and Japan having “peaked” in new deployments, “the risk is now much better understood and forecasts have adjusted.”

Moreover, Perkins thinks the company is walking away from some deals, which is a good thing, because it will boost profitability, helping to lift his estimates:

At its 7 Nov. Investor Day, Ericsson made it clear that underlying profitability has been improving faster than we had expected, but it has been hidden by currency movements. However, we felt the key change at the event was in management’s tone, with an emphasis on “profitable growth”. While we have heard similar plans before, better profitability has sometimes been sacrificed to market share. In completing our proprietary contract database, we found that Ericsson has not taken share in 2013 as it has done in previous years. Notable contracts where Ericsson appears to have lost ground against competition include Sprint and China Mobile. While sacrificing market share may look like a problem, it usually boosts medium-term margins, as NSN has shown. It is an especially good idea if the bidding for the contract has become aggressive. Although losing a few contracts is unlikely to have a major short-term impact, we think exercising the “walk away” option is an important turning point for Ericsson at a time when competition may get much fiercer. We worry that short-term slowdown in US and Japan could hurt the next couple of quarters. However, despite the low-growth top-line, we have raised our network operating margins on the back of more capacity business and management’s willingness to walk away from dilutive deals.

Perkins writes that he maintains a database of 3,000 contracts bid for in the last 12 years, and that he has seen vendors win contracts at the expense of cutting prices and suffering margin decline.

An example of this type of company over the past few years has been Ericsson. The company bid aggressively for European modernisation contracts in 2010 and 2011. However, by bidding aggressively to capture these contracts, Ericsson suffered from weak margins during 2012 and into 2013. An examination of recently awarded contracts appears to show a change in Ericsson’s approach in 2013. While the company started the year winning a few contracts, it has lost out in a few noteworthy deals recently. For the year as a whole, the company is flat, neither gaining nor losing net contracts.

Perkins raised his estimates for 2014 and 2015 by 20% and 30%, he writes. He now projects 2014 revenue of 230 Swedish Kroner, and adjusted EPS of kr6.82 per share. That profit figure is above the Street’s projection for kr5.88 per share.

As for Nokia, Perkins’s view is the flip-side of his view on Ericsson: the company is becoming more aggressive on contract wins, which worries him:

With the handset division gone, the main revenue generator will be NSN. This company has addressed significant issues over the past few years, reducing headcount by S 26,000 employees since 2011 and restructured to focus on profitable areas and contracts. T Nokia Solutions Networks (NSN) appears to be well on the way to recovery, showing good O profitability despite a shrinking top line. But we may be seeing a change in management U strategy. In recent contracts (notably with Sprint and China Mobile), we have observed a T more aggressive stance by NSN in taking market share. This seems to tie in with management’s recent comments that NSN “will focus on strengthening our topline performance” (Q3 2013 results announcement). The danger is that although bidding aggressively for new contracts should boost revenues, it may be at the expense of margins. Consensus expectations for NSN margins are 8.9% for 2014. We have reduced our assumption for NSN margins to 8.0% for the year. This helps reduce our value for NSN in our SOTP from €2.6 to €1.9.

Perkins notes the company appears to have won business with China Mobile (CHL):

A second important contract has been China Mobile. Neither Ericsson nor NSN were involved in China Mobile’s 3G rollout as China Mobile was using a homegrown technology called TD- SCDMA. However, China Mobile is using a much more established technology for its 4G rollout. The contracts awards were announced in October 2013. It appears that NSN has the largest share of the contract of the Western suppliers, at least initially. Given that this was a tender bid and included the Chinese competition, we suspect pricing was very competitive. For NSN to win the largest share implies that it was providing attractive deals.

Perkins thinks the aggressive taking of margin share for Nokia is going to reverse improving margins in recent years, and he cut his outlook for operating profit margin below consensus:

Consensus is already moving in this direction. The consensus forecast for NSN margins is 8.9% and 8.9% in 2014 and 2015, down on the estimated 10.0% that the market expects for 2013. Our current assumptions are lower: we have reduced our margin assumptions to 8.0% and 8.6% for 2014 and 2015 on the back of worries over rising competition which could reduce margins for the company overall.

Perkins cut his sum-of-the-parts model for the stock based on reduced operating margin outlook:

Our sum-of-the-parts valuation decreases from €6.3 to €5.8. The change is driven by the assumption that the company pays a €0.30 dividend in 2014 and a lower value for NSN where we have reduced our operating margin assumptions. These reductions are partially offset by the value of the tax losses and an increase in the value of HERE.

Agree with Perkins, Ericsson has plenty of ongoing capacity business now which is more profitable than deployment. What he means by aggressive bids is taking a huge loss to gain share. So the analogy is more like taking a 1B loss on something is not worth gaining market share. You can't assume NSN will make any positive margin on CM deal.

DECEMBER 11, 2013 2:46 P.M.

Anonymous wrote:

But you can assume they will lose money on a China Mobile deal, if in fact they do have a deal?

Any chance they will make $$ on the ongong capacity service any roll out deal fosters?

DECEMBER 11, 2013 4:49 P.M.

sidiji wrote:

same analyst....mr. Andy Perkins right up there with Ferragu for accuracy (how come he still has a job?)

Jun 13, 2013 - upgrades blackberry with target of $17

BlackBerry shares are up 6% (as of this writing) after Societe Generale analyst Andy Perkins made positive note on the company. Perkins has changed his rating on the stock to Buy and gives it a price target of $17 from $13.

The higher rating comes after Perkins’ checks show sales of the BlackBerry Z10 and Q10 may have done better than most expect. “In total, we believe that Blackberry 10 handsets could record sales in excess of 5m units,” says Perkins.

DECEMBER 12, 2013 12:46 P.M.

cynic al wrote:

Cash will represent almost half of NOK's market cap after the MSFT payment. I'm up 100%, and think I'll take my chances.

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.